How to Do a Stock Analysis

Part I: Beta 

Response 

It is indeed true that beta is an important indicator of stock analysis. Beta is critical as a measure of systematic risk or volatility of a portfolio or security compared to the given market (Andersen et al., 2006). Beta is used in describing the expected returns for stocks and systematic risk relationships as found in the capital asset pricing model (CAPM). The beta calculation is important in helping the investor know whether a particular stock is moving in a similar direction with respect to the whole market. The three companies with their betas as follows- Target Corporation’s beta is 0.80, Dollar General’s beta as 0.53, Costco’s beta as 0.68, and Walmart’s beta as 0.31. Understanding beta is effective for any stock analysis regarding systematic risks (Malkiel, 2014). If beta is greater than 1, then it means the volatility of the stock is higher than the whole market. If the beta is lower than 1, then the volatility is lower as compared to the whole market. In this case, Target Corporation with the beta as 0.80 has high volatility as compared to the other markets since it is closer to 1 than the rest with lower betas, as Dollar General’s beta as 0.53, Costco’s beta as 0.68 and Walmart’s beta as 0.31. Walmart’s beta with 0.31 has the lowest volatility as compared to the other markets. As a result, Target Corporation is associated with higher potential returns due to how risky it is as compared to the other three companies. 

Part II: Capital Budgeting 

Response 

Both the Internal Rate of Return (IRR) and Net Present Value (NPV) are used as important tools of capital budgeting. NPV represents both the negative and positive future cash flows in the life cycle of the project discounted today (Arshad, 2012). IRR is also a capital budgeting tool used in the profit estimation of a given project. Both methods are comparable since they are based on the project proposals on rejecting or accepting any given decisions. Many individuals have their preference of IRR over the NPV due to the issues regarding measurement despite the challenges of the tool in having flaws in accounting factors. IRR is considered inferior as compared to NOV in ranking and evaluation of projects (Weber, 2014). NPV is better when it comes to tackling discount rates as it obtains the project invested amount to recover any current market earnings from the given amount invested. 

It is indeed true that companies pursue their goals to achieve maximum profits. Large companies mean large profit margins in the long run. It is ethical for such companies to use their vast wealth in raising other infant businesses at the same time keeping their image. Therefore, companies need to act ethically. 

References 

Andersen, T. G., Bollerslev, T., Diebold, F. X., & Wu, G. (2006). Realized beta: Persistence and predictability.  Advances in econometrics ,  20 (2), 1-39. 

Retrieved from: https://www.emerald.com/insight/content/doi/10.1016/S0731-9053(05)20020-8/full/html 

Arshad, A. (2012). Net present value is better than internal rate of return.  Interdisciplinary journal of contemporary research in business ,  4 (8), 211-219. 

Retrieved from: http://www.academia.edu/download/53524505/211-219.pdf 

Malkiel, B. G. (2014). Is smart beta really smart?  The Journal of Portfolio Management ,  40 (5), 127-134. 

Retrieved from: https://jpm.pm-research.com/content/40/5/127.short 

Weber, T. A. (2014). On the (non-) equivalence of IRR and NPV.  Journal of Mathematical Economics ,  52 , 25-39. 

Retrieved from: https://www.sciencedirect.com/science/article/pii/S0304406814000457